Despite weak natural gas prices, Talisman said it was increasing its spending on promising U.S. and Canadian shale gas prospects, one of the main parts of the business it is emphasizing in a recently reshaped strategy.

In the Marcellus shale in Pennsylvania, which is proving to be one of the continent’s more prolific unconventional gas plays, the company is increasing its 2009 drilling plans by nearly 40 percent to 50 wells.

It cited recent drilling success in the region, where it now produces 30 million cubic feet a day, and its close proximity to major gas markets.

Talisman Chief Executive John Manzoni said the move involves adding one more rig to those it has drilling in the area, where wells cost about $4 million and have been producing at initial rates of as much as 5 million cubic feet a day.

Boosting activity there makes sense, despite gas prices that are down more than 60 percent from a year ago, as it positions Talisman for when markets improve as early as next year, analyst Ben Dell of Bernstein Global Wealth Management said.

“Arguably, this is one of the two areas where Talisman can build a material business with strong consistent growth and relatively high returns,” Dell said. “The Marcellus, out of all the gas out there, is still one of the lowest-cost sources of supply.”

He said Talisman’s Southeast Asian business is the other top one in terms of growth potential.

Advancing recovery technology for shale plays has changed the gas supply outlook for North America to one of surplus from expected shortages. Such reserves are unlocked by drilling horizontal wells and fracturing the rock at various intervals deep underground.

Talisman and its partner, Questerre Energy Corp (QEC.TO), are intensifying exploration efforts in the Utica shale of Quebec’s St. Lawrence Lowlands. There, the companies now plan to drill two horizontal wells before the end of the year.

EARNINGS, CASH FLOW DOWN

Talisman, which is also concentrating on developing oil prospects in the North Sea and exploration elsewhere while divesting other assets, earned C$63 million ($58.1 million), or 6 Canadian cents a share, in the second quarter, down from a year-earlier C$426 million, or 42 Canadian cents a share.

It was expected to earn 7 Canadian cents a share, the average forecast of analysts surveyed by Reuters Estimates.

Cash flow, a glimpse into the company’s ability to fund drilling and other projects, fell 47 percent to C$900 million, or 89 Canadian cents a share, from C$1.69 billion, or C$1.66 a share.

During the quarter, it closed sales of gas gathering and processing assets in Alberta and non-core properties in Saskatchewan and Trinidad for C$1.3 billion, bringing the value of asset sales since mid-2008 to C$2.5 billion.

Talisman shares were off 79 Canadian cents, or nearly 5 percent, at C$16.30 on the Toronto Stock Exchange on Wednesday, a day when crude oil prices tumbled nearly 6 percent after U.S. data showed an unexpected surge in inventories.

The company and its industry rivals have suffered big drops in profits as U.S. crude averaged $59.79 a barrel in the quarter, down 52 percent from a year earlier. Canadian natural gas prices averaged C$3.28 a gigajoule, down 66 percent, as inventories across the continent swelled.

Talisman said production averaged 424,000 barrels of oil equivalent a day, down 2 percent from the year before.

Meanwhile, the company, which agreed last month to buy Papua New Guinea gas producer Rift Oil Plc RIFT.L for $187 million, has its eyes open for more deals in its main operating regions, Manzoni said.

“We continue to be searching and looking, and we will maintain the discipline that I think we’ve demonstrated so far. We’re not going to just leap,” he told analysts. “We have the capacity and we’ll act when the value looks right.”